Category: Post-dicting the present

Postdicting the Future: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime from The Hill

[This is a July 30, 2013 summary from The Hill of my series that first appeared in the Huffington Post on July 26, 2013–lets see how I did now that music is all modern and chrome.]

1.  Create an Audit Right for Songwriters for Compulsory Licenses:  One of the oldest compulsory licenses in the Copyright Act is the “mechanical license”, the statutory mandate forcing songwriters to license songs that dates from 1909.  The government mandates the license and also mandates the rate that songwriters are paid—from 1909 until 1977 that rate was set at 2¢ per recording.  Although that rate was eventually indexed to inflation leading to the current 9.1¢ minimum, songwriters had to dig out of a deep hole.

Getting paid is another story.  This statutory license requires songwriters be sent “statements of account” for royalties—but songwriters are not allowed to conduct a “royalty compliance” examination (called an “audit”).  The law requires a company officer and a CPA to certify the company’s statements—a practice rarely complied with.  As recently demonstrated by Aimee Mann’s lawsuit against Medianet, if songwriters don’t get paid there’s not much they can do except sue—a costly process.

The government tells the songwriter “trust—but don’t verify.”  This is an easy fix.  Congress could give songwriters an audit right as they did for stakeholders in the contemporary digital performance compulsory license for satellite radio and Internet radio.

2.  Allow Artists and Songwriters to Opt Out of the Compulsory License:  The recent blow-up regarding the so-called “Internet Radio Fairness Act” and the related ASCAP and BMI rate court proceedings should let the Congress know that there are many artists and songwriters who want to be able to decide who gets to license their songs.  Again, the digital performance compulsory license allows copyright owners to control “interactive” uses of their works—why not at least do the same for the mechanical license as well?

  1. Require Digital Royalties for pre-72 Sound Recordings:  Sound recordings did not receive federal copyright protection until 1972.  When the Congress established the digital performance royalty, it seemed to clearly apply to all recordings and did not arbitrarily exclude recordings prior to 1972.  However, this “gotcha” is used by SiriusXM and others to avoid paying great American artists whose records were released before 1972—jazz, R&B and rock legends get nothing.  Congress could fix this “gotcha” and secure a fair share of digital performance royalties to these authors of our musical heritage.

4.  Require All Unpaid Statutory Mechanical Royalties Be Paid to the State Unclaimed Property Offices:  As Aimee Mann’s alleged in her lawsuit against the white label provider Medianet, witnesses stated that 23 percent of the songs used by Medianet are unlicensed—which could easily be millions of songs if true.  And there are likely a number of digital music services that are arbitrarily holding unpaid royalties in an unauthorized “escrow.”

It seems that there could be substantial royalties controlled by the very retailers who must pay songwriters under the law, a potentially significant moral hazard.  Congress could require that any “escrowed” royalties be paid over under State unclaimed property laws—a lawful “escrow.”

5.  Require that Online and Offline Videos Follow the Same Rules:  As online video platforms become available through Internet enabled home televisions, attention should be paid to a frequently overlooked category of songwriter—the film and television music composers.  Current reporting by online video platforms makes it difficult for score composers to be paid for their work.  The Congress may well ask whether those who seek to replace television should be held to the same licensing standards as television.

These are but a few ideas the Congress could be addressing that might make a difference in the lives of artists and songwriters and would cost the taxpayer very little.  All leverage existing structures and bureaucracies, eliminate “gotchas,” and help to reduce the unintended consequences of government mandated compulsory licensing.

Postdicting the Future: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 4: Fixing Unmatched Songwriter Royalties

[This series first appeared on the Huffington Post 2013–lets see how I did now that music is all modern and chrome.]

The US is alone in the world in maintaining a compulsory license for songs. The government forces songwriters to license their songs at a rate approved by the government and then has rather flimsy rules about how songwriters actually get paid. These flimsy rules, I suggest, have resulted in unknown amounts of royalties not finding their way to songwriters, particularly under compulsory licenses used by on-demand digital music services.

There’s an easy fix for this — the same rule that was applied against record companies and music publishers for unclaimed royalties in the past: Pay the money to state unclaimed property offices. If songwriters are getting ripped off by brand sponsored piracy on the unlicensed sites, then let’s at least make sure they get paid on the licensed services.

The Compulsory License for Songs

When the Congress established the compulsory license in 1909, the legislative body was concerned that granting exclusive rights in “mechanical royalties” for songs in piano rolls might create a monopoly if a single publisher could buy up the market in songs. However real that concern might have been at the time, the most common complaint from digital music services about songs is that the music publishing market is too fragmented, so it seems that argument is no longer relevant.

One of the big users of compulsory licenses is, of course, Google Play. Concern about the antitrust lusting of songwriters is particularly difficult to comprehend in a world in which the same government allows Google to buy and subsidize YouTube with monopoly rents, buy Double Click to achieve a dominant position in online advertising, and is given a pass by the FTC for antitrust violations. But those songwriters…boy, we have to keep a close eye on them.

Unsupervised Digital Music Services

So what appears to be happening is this: Digital music services use the compulsory license and its labyrinthine regulations — often with notices that are too late, accountings that are noncompliant and data that is just incorrect. To give you a sense of scope, digital music services often offer 20 million or so recordings, all of which contain the co-equal copyright in the song being recorded. Songs and recordings of songs have to be separately licensed for on-demand streaming services (especially the popular “cover recordings”). Songs are frequently co-owned — so the service using the compulsory license must notify a minimum of 20 million songwriters of their use of the song and often two or more writers per song. So let’s just call it tens of millions of licenses.

The digital music services must then track the use of these songs and recordings and match the usage to licenses obtained. There inevitably will be songs for which the writers cannot be found. So even if you assume that these companies can get to the matching stage without making any mistakes at all, what happens when there is usage — and therefore payable royalties — for songs that the service is unable to match — even for the most honest of reasons.

How Digital Music Services Pay Themselves Free Money

Add to this problem another problem — digital music services frequently try to dupe songwriters — the ones they have found — into agreeing that the service need only account to them if the songwriter has over a certain amount in payable royalties — somewhere between $50 and $250 depending on the service. (Google Play, for example, has a $100 minimum threshold — unilaterally imposed — on all international and “friction free” electronic payments.)

To put some math on this, realize that there are about 20 million songs typically available in a broad based retail offering such as Google Play or Spotify. Assume that on average 50 percent achieve $25 in earnings in a given calendar quarter accounting period. (This is consistent with both the “long tail” power law type sales distribution and the miniscule royalties paid to songwriters by these services.)

If a service holds royalty payments from songwriters until payable royalties exceed $25 (such as Google Play’s $100 default threshold as stated in their “Publisher Statement of Account Preference”), this means that the service could then be sitting on up to $250,000,000 in interest-free money. Free money that they theoretically may never have to pay out and only have to pay out when the service determines that the songwriter’s account is payable. Free money that is not permitted under the compulsory license rules for songs.

And that’s one service.

This policy of withholding royalties is fraught with moral hazard and practical problems: The heirs of one songwriter recently tried to sort out these payments and were told they needed to hire a lawyer to deal with the highly litigious digital music service. They couldn’t afford a lawyer so guess what happens to the unclaimed monies? And then there’s the statute of limitations.

Unmatched and Unclaimed Royalties

But there’s another problem with the digital music services — if they service cannot match usage (and earnings) to a royalty recipient in their systems, what happens then? Particularly with monies based on a share of advertising revenue that is distributed proportionately based on usage?

In this example, if in one month all songs were played 100 times and your song was played 10 times, then you would get 10/100 (or 10 percentt) of the advertising pie for that period. But — if there were actually 120 songs played during that period but only 100 could be matched, what happens to the other 20 that were unmatched? There is a growing belief that what happens is that the services don’t count the 20 unmatched songs, and divide the pie up based on the 100 they are able to match.

That means — there are 20 songs that were exploited but that are never paid and are not on the books. Even though there should be no songs on the service that were unlicensed because the compulsory license applies. If this seems high, remember that MediaNet’s lawyers acknowledged in a declaration cited in the current case by Aimee Mann against MediaNet that 23 percent of the millions of songs on the service are unlicensed.

By not counting the unmatched (and probably also unlicensed) songs, a service could argue — albeit fallaciously — that it had no “unallocated” royalties as it allocated all payable royalties to songs it could match and did not accrue any unpaid royalties. If I’m right about this, services are overpaying the matched songs with a share of revenue from the unmatched songs (in our example, 10/120 or 8-1/3 percent instead of the overpayment of 10/100 or 10 percent).

Because the Congress does not allow songwriters to audit the digital music services, there is no real way to know whether this is happening or the degree to which it is happening. If 23 percent of the MediaNet songs are unlicensed, royalties payable on any activity on these songs seems like it should at least be accrued until the songwriters can be found.

This is, of course, why states have unclaimed property statutes. In 2004, then Attorney General Eliot Spitzer chased record companies and music publishers for unpaid royalties for artists who could not be found for a variety of reasons, some plausible, some not so plausible. Spitzer forced the royalties to be paid—like utility deposits, dividends, abandoned bank accounts, the works—to the state unclaimed property office where the monies are held forever and where somebody eventually tries to track down the rightful owner.

Of course — there is a chance that if the digital music services did this voluntarily they might be admitting that they were using unlicensed songs and they want to keep a good eye on those kinds of admissions. So they will come up with many excuses for why they should not be subject to the same laws as everyone else. It is, after all, the Internet, and you know how that can be.

An Easy Fix for Congress: Pay unclaimed money to people who deal with unclaimed money

Even if the Congress does not establish an audit right for songwriters for mechanical royalties as they have for rights holders under the more contemporary webcasting compulsory license and the Audio Home Recording Act, it would be quite simple for the Congress to clarify once and for all that unpaid royalties — whether for the unmet minimum thresholds unilaterally imposed by digital music services, unknown addresses for songwriters, or any other reason — should be paid to the state unclaimed property offices in the state of the songwriter’s last known address or at least the state where the company does business.

Companies that want to take advantage of the compulsory license rules for songs shouldn’t also get to make their own rules to take advantage of songwriters.

Postdicting the Present: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 3: Create an Audit Right for Songwriters

[This series first appeared on the Huffington Post 2013–lets see how I did now that music is all modern and chrome.]

Once a song is distributed to the public with the permission of the owner of the copyright in the song, the U.S. Copyright Act requires songwriters to license songs for reproduction and distribution under a “compulsory license.” This license is typically called a “mechanical license” because it only covers the “mechanical reproduction” of the song and does not, for example, include the right to use the song in a YouTube video or a motion picture, create a mashup or reprint the lyrics of the song.

When the Congress first developed the compulsory mechanical license in 1909, the concern was that “the right to make mechanical reproductions of musical works might become a monopoly controlled by a single company.” This monopoly never came to pass, and given the fragmentation in music licensing in the current environment, is unlikely to ever come about.

The user of the compulsory license (or “licensee”) has to comply with the rules for these licenses — including an obligation to account and pay royalties. If the licensee fails to comply, then the songwriter can in theory terminate the license, although making that termination stick usually requires an expensive copyright infringement lawsuit.

The bare compulsory license was not widely used before the advent of Internet music services — and then became something of a weapon of its own — music services bought into the “long tail” theory and tried to clear millions of songs overnight by massive mailings of notices of their intention to use the work. Given that songs are frequently co-written, this required sending huge numbers of notices. Behind each notice — supposedly — is a royalty account and statement of usage as required by law.

So if you’re following, songwriters suddenly were required to license to services they did not ask to be included in (unlike artists recording “cuts” the songwriter solicited), and only a limited paper trail to confirm the accuracy of royalty payments.

Trust, But Don’t Verify

Intuitively, you are probably thinking that songwriters would have the right to make the licensee provide evidence to demonstrate if this morass actually resulted in correct payments, right? Checking the evidence is called a “royalty compliance examination” or an “audit”. Since there is no “auditor general” of compulsory licenses appointed by the Congress, it would seem strange to believe that the intent of Congress was to codify the moral hazard of allowing the person doing the paying to examine their own books.

And yet, in the current practice, the fox is squarely among the chickens. This is because the government requires that the licensee merely “certifies” their own statements (i.e., promises the statements are true). This certification is done on a monthly basis by an officer of the licensee and annually by the licensee’s CPA. And songwriters are told “trust me.”

The Industry Standard

It’s safe to say that this certification process is drastically different than any industry-standard mechanical license. There is a long history of audits in the music business — the State of California even passed legislation in 2004 protecting the artist’s right to audit record companies. But when it comes to songwriters, the federal government forces songwriters to take the compulsory license, tells them the royalty rate they are to be paid, but does not permit songwriters to audit the licensee.

Instead, the government permits the licensee to “certify” their own statements (i.e., promises the statements are true). This certification is done on a monthly basis by an officer of the licensee and annually by the licensee’s CPA. And songwriters are told “trust me.”

The Blanche Dubois Approach to Royalty Accounting

As Blanche Dubois said in A Streetcar Named Desire, “I have always depended on the kindness of strangers” and until the Congress updates this certification business model, that’s exactly what songwriters are expected to do, too.

The compulsory license requires certification by the licensee on a monthly basis and by a CPA on an annual basis.

An officer of the licensee is to include this certification oath with the songwriter’s monthly statement:

“I certify that I have examined this Monthly Statement of Account and that all statements of fact contained herein are true, complete, and correct to the best of my knowledge, information, and belief, and are made in good faith.”

The Annual Statement of Account requires this certification by a Certified Public Accountant for the licensee:

“We have examined the attached “Annual Statement of Account Under Compulsory License For Making and Distributing Phonorecords” for the fiscal year ended (date) of (name of the compulsory licensee) applicable to phonorecords embodying (title or titles of nondramatic musical works embodied in phonorecords made under the compulsory license) made under the provisions of section 115 of title 17 of the United States Code, as amended by Pub. L. 94-553, and applicable regulations of the United States Copyright Office. Our examination was made in accordance with generally accepted auditing standards and accordingly, included tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.”

Do you think that the CPA has in fact examined millions of annual statements? Does the CPA’s risk manager or insurance carrier know that the CPA is certifying to a multitude of songwriters that the CPA has actually “examined the attached “Annual Statement of Account…” when it is highly unlikely that the CPA has done any such thing?

Congress crafted this language in a much simpler time. Remember — there are now millions of these statements every month. Do you think that the certification oath could possibly be true every time? Some of the time? How would you find out?

Certification is a One-Way Street

This certification runs only one way — the government only offers licensees and CPAs the opportunity to certify that the books are correct, not that they are incorrect. Under current practice, if a company or CPA is squishy about how accurate their books and records are, songwriters typically get no certifications at all and just an uncertified royalty statement if they are lucky.

What conclusion should be drawn from a failure to certify? Why not provide an alternative certification — that the licensee’s books and records cannot be certified. While it may be unrealistic to think that companies would ever disqualify their own books, it is not unrealistic to think that a CPA might choose this option on the annual statement of account given the CPA’s licensing responsibilities.

And it is definitely not unrealistic to think that the company’s books would be more likely to be accurate if the company knew that this disqualification option were available to the CPA. But the simplest thing Congress could do is to create an audit right for the compulsory license.

Let’s Keep it Simple

Chairman Goodlatte has said he intends to update the Copyright Act to bring it into line with the digital age. The Congress already allowed audits for the compulsory license for sound recordings and the webcasting royalty established under Section 114. This mechanism that Congress created in the recent past is working quite well.

Chairman Goodlatte could borrow heavily from the audit rights for the Section 114 compulsory license for sound recordings, and allow songwriters to conduct group audits under Section 115 to avoid a multiplicity of audits.

These changes would bring help bring song licensing into the 21st century and allow songwriters to enjoy greater confidence that they are being paid properly. Creating an audit right under Section 115 compulsory licenses would allow market forces to work to align the incentives toward better payments for songwriters.

Postdicting the Present: Five Things Congress Could Do for Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 2: Update the Compulsory License for Songwriters

[This series first appeared in the Huffington Post on July 26, 2013–lets see how I did now that music is all modern and chrome.]

House Judiciary Committee Chairman Bob Goodlatte (R-VA) is holding hearings on a potential revision to the Copyright Act. One area he might want to take a fresh look at is whether we still need a compulsory license to protect the public from the antitrust ambitions…of songwriters.

A “compulsory license” is a government-mandated requirement that someone license property on terms set by the government. Very often, the government also mandates the price that the property owner may charge for the rights she is forced to license. Americans enjoy protection under the “takings clause” of the 5th Amendment of the Constitution, so these compulsory licenses are fairly rare. The Constitution also requires that “takings” require “just compensation” to the property owner.

Did you know that the Congress established a compulsory license for songs? Yes, they did in 1909. This compulsory license is often called the “mechanical” license because it covers the “mechanical reproduction” of the song, a somewhat arcane concept better understood as a copy. The contemporary version of the 1909 license covers permanent downloads and certain categories of on-demand streaming as well as compact discs and vinyl.

The government royalty rate for songs is a “minimum” rate—of course, no one should be surprised to know that if the only rate anyone is required to pay is the minimum and the songwriter cannot decline the license, the minimum may as well be a maximum. And that is what has happened.

Does this sound like the kind of government action that is required to protect the public from songwriters in the time of the Internet?

For over a century, songwriters have been forced to give up control over who records their songs. They also have to accept the royalty rate that the Congress determines to be “just compensation” in a market already distorted by the compulsory license. (The Congress determined 2¢ a copy was “just compensation” from 1909 to 1977—the rate then was indexed to inflation and the minimum rate is currently 9.1¢.)

One might ask why do we need a compulsory license for songs? At a time when the dominant big tech companies drive around the world snorting up private data and taking pictures of your house, have scant attention paid to them when they gobble up companies to increase their market dominance or even monopoly, and employ an unprecedented number of lobbyists to influence governments around the world, why are we still worried about compulsory licenses for songs? To protect the public from the anticompetitive ambitions of songwriters?

Nearly 10 years ago, former Register of Copyright Marybeth Peters told the Congress that abandoning the compulsory may be an idea whose time has come:

[T]oday all…countries, except for the United States and Australia, have eliminated such compulsory licenses from their copyright laws. A fundamental principle of copyright is that the author should have the exclusive right to exploit the market for his work, except where this would conflict with the public interest. A compulsory license limits an author’s bargaining power. It deprives the author of determining with whom and on what terms he wishes to do business. In fact, the Register of Copyrights’ 1961 Report on the General Revision of the U.S. Copyright Law favored elimination of this compulsory license.

I believe that the time has come to again consider whether there is really a need for such a compulsory license. Since most of the world functions without such a license, why should one be needed in the United States?

Let Us Know How That Turns Out

The compulsory license essentially destroys the market for mechanical licenses—one reason that preserving a strong market for other forms of song licenses has become so important to songwriters. Yet the Congress still mandates that songwriters must license their songs and tells songwriters the price they can charge—but they do not allow the songwriter to determine whether the government mandated rate has been paid correctly under the government mandated license.

You probably assumed that once the government intervened in the market to mandate a license and a royalty rate, that they would feel obligated to make sure that their government royalty was actually paid to the songwriters whose bargaining rights were cut off.

But the government doesn’t do that. If songwriters don’t get paid, it is up to the songwriter to terminate their statutory license and bring a copyright infringement claim for statutory damages against someone they did not want to record their songs, who didn’t pay the bill, and who probably will either be difficult to find or is a Big Tech company that is oblivious to the claim of any one songwriter because the company can crush them like a gnat in litigation.

In this situation, the government tells songwriters, “let us know how that turns out.”

What Is Good About Uniform License Terms

The potential fix is actually relatively easy. Just as we have uniform laws like the Uniform Partnership Act, there is a value to having certain terms of a mechanical license set in the Copyright Act. The standard negotiated mechanical license is a private contract that typically starts with something like “this license incorporates by reference the mechanical license in the Copyright Act except as set forth herein”. The problem is not that there is a uniform set of terms that copyright licensees and licensors can reference.

The problem is the compulsory part.

The easy fix would be to allow songwriters either to opt in to the existing statutory license terms or to opt out of it. The better route might be to phase in an “opt out” so the market could develop more gradually, and implement the “opt in” a few years down the road.

Either way, the change would probably best be implemented prospectively—there are a host of statutory licenses in use, either stand alone or private agreements granted by artist-songwriters in record deals that rely on the statutory license. Simply eliminating these existing licenses entirely would likely be extraordinarily disruptive.

Maintaining an optional “uniform mechanical license” seems to make good commercial sense.

Communicating the Opt In Decision

As we are often told, the Internet has brought unprecedented democratization to creators. A songwriter could communicate her decision to opt in or opt out of the statutory license in a host of ways, from Twitter to blogs. But as a more formal matter, the good news is that there is already an existing methodology for communicating legal notices regarding the disposition of copyrights.

The U.S. Copyright Office has a document repository that has been in place for decades (See “Recordation of Transfers and Other Documents“ described in Copyright Office Circular 12). For a modest fee (starting at $105) anyone can register a document and “to encourage document recordation, the law confers certain legal advantages, including priority between conflicting transfers and “constructive notice”…if certain requirements are met.”

So an opt in notice could easily be recorded in the Copyright Office and take advantage of the existing jurisprudence around document recording. Those who find the fees burdensome should be authorized to give notice on their websites, Facebook pages, or other ways to leverage the democratic benefits of the ever popular social media.

Abandoning the government mandated compulsory license would free songwriters to participate in the market for reproductions of their songs, and would be a great step forward. However, this still doesn’t deal with the problem of getting paid on existing compulsory licenses where the government has largely abandoned the songwriter after forcing her to get into the situation in the first place. I’ll address a couple ideas for fixes in Part 3.

Postdicting the Present: Five Things Congress Could Do For Music Creators That Wouldn’t Cost the Taxpayer a Dime Part 1: Pre-72 Sound Recordings

[This series first appeared in the Huffington Post on July 26, 2013–lets see how I did now that music is all modern and chrome.]

In this and future posts, I will be addressing five things the Congress could do for music creators that are easy to do and that would help develop an online market for music. First up is a slightly esoteric, but important area: royalties paid by companies like SiriusXM for sound recordings made before 1972.

Many of us in the music business know that songwriters and recording artists are financially worse off under the “new boss” than they were under the “old boss.” We have watched older artists “die on the bandstand” because the royalty or residual income they had counted on to support them in their retirement began evaporating with the arrival of the Internet in their lives. We have watched younger artists and songwriters essentially give up on the idea of doing anything but breaking even — maybe, if they are lucky — on sound recordings. And there is a growing realization that being in cut out bin, or as it’s known online the “long tail”…well, is not ideal. So what is to be done?

Fix the Past Before You Fix the Future

People of goodwill want to do something to help, starting with Chairman Bob Goodlatte of the House Judiciary Committee. Chairman Goodlatte is holding a series of hearings about what to do to address the current U.S. Copyright Act which had its last general revision in 1976 and has evolved through amendments since then.

There are lots of different issues that a variety of people want addressed in the new act, but my guess is that there is a concern about another competing law, the law of unintended consequences. And when we as a nation are staring double digit real unemployment in the face, doing no harm may be almost as important as fixing the harm from the last time they tried to do no harm.

Here is one thing the Congress could do today to fix the unintended consequences of the past before they turn to the future — all of which, if not fixed first, will continue to fester in any new laws.

Pre-72 Sound Recordings and Webcasting Royalties

Congress made a great and politically difficult lift when it created the public performance right in digital uses of sound recordings. The Congress took a very comprehensive look in 1995 and again in 1998 at how best to encourage the development of this market and created a limited compulsory license for the digital performance right, a royalty system and a collection and accounting function for the payment of those royalties. All countries that are business partners with the U.S. except China recognize a broad right in public performances of sound recordings, so U.S. recognition of the digital right is a good first step.

What they did not address was what may seem like a “gotcha” loophole — should that federal copyright royalty be available to recordings that are not protected by federal copyright protection? An additional fact — federal copyright protection of sound recordings only came into effect in 1972. Obviously there were plenty of sound recordings available before then, but those sound recordings are protected under a patchwork of state laws and were not granted federal protection.

Hold on, you say — sound recordings before 1972 include formative recording artists like Louis Armstrong, Sarah Vaughn, Duke Ellington, Bessie Smith, John Coltrane, Ella Fitzgerald, Robert Johnson, Janis Joplin, Otis Redding, Cream, The Temptations, Jimi Hendrix, The Doors and The Beatles. And those are just the famous ones. You know — if you wanted to you could make entire satellite radio channels from just those artists. And if you thought that, you’d be right.

Now add an additional fact: When Pandora and SiriusXM pay royalties for sound recordings under the compulsory license, the artists or sound recording owners cannot say “no”, they cannot opt out of the compulsory license. And when those royalties are paid, the payment is made to SoundExchange which then pays 45 percent of the net royalty to the artist and 2.5 percent to each of the principle unions involved — outside of the artist’s recording contract so the labels never touch it.

In other words — the money goes directly to the artists. So the Congress did a great, great thing (modeled, frankly, on the way songwriters are treated by their performance rights organizations).

An “undeserved windfall”?

Enter the loophole, because some people just have to take an edge — or as the tech folks say, an “exploit.” The recent Copyright Office report to the Congress on pre-72 sound recordings notes (text accompanying footnote 444):

SiriusXM [told the Copyright Office] that requiring statutory services [like SiriusXM] to pay under the statutory license for recordings currently protected under state law would provide an undeserved windfall for recordings created and paid for more than 40 years ago, at the expense of services like Sirius XM. It also noted that to the extent that any services are mistakenly making payments for public performance of pre-1972 sound recordings, that SoundExchange should not be accepting or distributing such payments.

An “undeserved windfall” to musicians? To artists? To all of those artists listed above and many, many more? An “undeserved windfall” to artists and musicians who are nearing or well past retirement age and who gave us some of the greatest American music that is still in demand 50 years later to the great benefit of those taking advantage of the compulsory license like SiriusXM? While SiriusXM has over a billion dollars in free cash flow?

If there is an undeserved windfall, it is to these beneficiaries of the digital public performance right, webcasters and satellite radio in particular, who want to stiff artists and musicians when they need it most based on a “gotcha” loophole that the Congress could fix.

Let’s “Level the Playing Field” and Fix the Loophole

There are a lot of arguments about other aspects of federalizing pre-72 sound recordings, but the Chairman Goodlatte does not need to get drawn into every single one of these unrelated arguments. (See Copyright Office Report at p. 122.) It would be a simple fix to require the payment of statutory royalties by the commercial beneficiaries of the compulsory license — to all the artists, not just the ones whose recordings happened to be released in the right year.

Webcasters offered tortured arguments about “rate parity” in the “Internet Radio Fairness Act” legislation — well, “fairness” begins at home. It was encouraging to hear Ranking Member Mel Watt’s commitment to the public performance royalty at this week’s hearingin the House Subcommittee on Courts, Intellectual Property, and the Internet, but if this pre-72 “gotcha” loophole, this “exploit,” isn’t fixed, it will be perpetuated once terrestrial radio starts paying its fair share as Mr. Watt desires.

The Congress could fix this problem with the stroke of a pen. This would accomplish both fair payments to artists and musicians on pre-72 recordings, and also get the issue out of the way for future expansion of the public performance right — both worthy goals.

And wouldn’t cost the taxpayer a dime.